The pound is likely to come under increased pressure after Britain lost its
prized “triple A” credit rating for the first time since 1978.

The decision by Moody’s to cut the UK’s government debt rating one notch from “AAA” — the highest possible level — to “AA1” on its expectation that growth will “remain sluggish over the next few years” could lead to “aggressive selling” of sterling, analysts warned.

Howard Archer, chief UK and European economist at IHS Global Insight, said “the pound will be particularly vulnerable” following the ratings agency’s move last night. Moody’s pointed to “continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth” which it expects will “extend into the second half of the decade”.

The credit ratings agency also noted that the Government’s debt reduction programme faced significant “challenges” and that the UK’s huge debts are unlikely to “reverse before 2016”.

However, Moody’s, which is the first ratings agency to lower the UK from the highest rating, said the outlook on UK debt is stable and that any “fiscal loosening” would risk another downgrade.

Germany and Canada are now the only major economies to still enjoy a AAA rating.

While the Moody’s downgrade of UK debt is politically significant, many economists question the credibility of the ratings agencies and say that the importance of a country’s rating to its borrowing costs is much less significant than in earlier decades.

Mr Archer called the move by Moody’s “an embarrassment for the Government and a cause for piqued pride”.

However, he added: “We suspect that the loss of the AAA rating will have only a limited negative impact for the UK economy.

“This was the case for both France and the USA.

“There are so few countries left now with a AAA rating, that to lose it is not the stigma or major threat to market confidence that it would have been say a couple of years ago.”

He said the downgrade had largely already been “priced into the markets” but warned that the pound will suffer.